Daily Market Pulse

Equities lower, USD higher this morning


The USD is trading higher this morning after improving in holiday-thinned trade on Monday. U.S. jobs data showed job growth slowed further in August, while traders shifted their focus to the European Central Bank’s meeting on Thursday. While the NFP number did raise doubts on the sustainability of the US economy, the unemployment rate fell to 8.4% in August from 10.2% in July and this caught traders' attention. As the North American trading session begins this morning, traders seem to be focusing on Brexit, the ECB meeting, the change in power in Japan, and lower oil prices. Equity futures are mixed this morning and NASDAQ futures are indicating an opening drop of more than 2% after the big tech sell-off on Friday. Dow Futures were little changed overnight, while S&P futures pointed lower. There is concern among traders that the strong run-up of tech stocks has pushed valuations to levels that are not sustainable and extreme overbought conditions could make the market ripe for a pull-back. US Treasury yields are lower this morning, as investors keep their eye on US-China tensions as well as watching to see if there is a recovery in the equity markets. The 10-year note is trading at 0.6968%, while the 30-year bond was trading at 1.4459%. As pressure remains on the equity markets, the USD may hold onto recent gains.


The EUR/USD remains under pressure this morning as traders focus on the ECB meeting scheduled for Thursday. While the ECB is expected to remain on hold the central bank may express concern regarding EUR's recent strength and its deflationary impact. Last week, the central bank's Chief Economist Philip Lane said that the exchange rate matters for monetary policy. The EUR/USD had rallied by over 5% this quarter alone and recently hit a multi-year high before turning lower following these remarks. Many considered this “verbal intervention”, a tactic used by central banks to influence the currency rates. Eurozone Final GDP was released this morning, but the numbers were pretty much ignored by traders even though there was an upward revision in Q2 GDP. Eurozone economy contracted less-than-expected in the second quarter. The bloc’s quarterly reading came in at -11.8%, beating expectation of -12.1% and -12.1% reported in the preliminary reading. The annualized figure arrived at -14.7% vs. -15% expected and -15% last. Meanwhile, the number of employed persons in the Eurozone decreased by 2.9% QoQ in Q2 vs. -2.8% expected and -2.8% previous. Technically, the single currency is trading below the three moving averages, and RSI is currently at 31. As we move closer to the ECB meeting, pressure may remain on the single currency.


GBP/USD is also trading lower this morning, continuing the direction set up on Monday when the pound saw some heavy selling based on Brexit headlines. UK Prime Minister Boris Johnson threatened to walk away from Brexit talks if a deal is not reached by mid-October. The Financial Times further reported that the UK government is contemplating legislation to override the Brexit withdrawal agreement with the European Union (EU). This news soured the mood ahead of the eighth round of Brexit negotiations, which get underway later today, and it took its toll on the pound. After reaching year to date highs at the beginning of the month, the pound has fallen over 4 cents. Technically, the currency pair has breached all moving averages as the 200-day crossed the 100-day and the currency is in a truly oversold state with RSI trading at the 15-level currently. This makes the GBP ripe for a short-covering reversal but that has not occurred to this point. Adding to the pressure on the pound, fresh US-China tensions have driven some traders towards safe-haven USD trades. Without any major economic news items expected today, Brexit concerns will play a major role in influencing the sentiment surrounding the pound. 


USD/JPY is trading near overnight highs in a very quiet trading range. The 100-day moving average is trading very close to crossing the 200-day moving average and the RSI level is at 63. Japan’s Q2 GDP contraction was revised down to -7.9% quarter-on-quarter, from -7.8% quarter-on-quarter. In annualized terms, GDP contracted -28.1% versus the preliminary reading of -27.8%. GDP deflator was finalized at 1.3% year-on-year. Economy Minister Yasutoshi Nishimura said, “the economy was in a severe state in April-June because we intentionally halted activity to contain the coronavirus “. Nevertheless “it has recently shown signs of picking up”. He also added that “household income is rising so the economy is likely to continue recovering but we must watch the impact of the renewed rise in infection numbers, as they could weigh on consumption.” On the political front, Japanese Chief Secretary and front-runner for the country’s leadership race Yoshihide Suga is being quoted via Reuters, making some comments on the economic recovery and coronavirus situation. He stated that “Japan will expand coronavirus testing capacity, and that the government will aim to make sure everyone receives coronavirus vaccines.” He also said that “protecting jobs, and continuing business are our utmost priority amid the severe economic situation.” His comments have not affected the USD/JPY as of yet. 


USD/CAD is trading at overnight highs this morning as the market reacts to falling oil prices. Technically the currency pair is testing strong resistance levels, while RSI levels have broken through the 70-area, presently at 73. The reversal of last week’s downward move on USD/CAD has seen some stop-loss short-covering as traders reassess their positions. The Bank of Canada meets tomorrow and there is no expectation of any change in policy. Brent crude futures are $0.08 lower trading at $41.93 a barrel, after falling 1.5% on Monday. U.S. West Texas Intermediate crude futures fell $0.76 to $39.01 per barrel. As Labor Day in the US marks the end of summer, a peak US driving season, traders are concerned about a possible rise in COVID-19 cases and less demand for oil. According to an analysis by Reuters, coronavirus cases rose in 22 of the 50 U.S. states during the holiday weekend. Brent crude prices fell on Monday, after Saudi Arabia’s Aramco, the world’s top oil exporter, cut the October official selling prices for its Arab Light crude, seen as a sign demand growth may be faltering as Covid-19 cases flare up around the world. With pressure on oil prices expected to continue to be pressured through the week, USD/CAD may move higher.


Mexico has raised a non-binding limit for gross debt to 70% of gross domestic product (GDP), almost 20 percentage points above last year’s level, for the remaining four years of the term of its fiscally conservative president. Mexico’s debt to GDP ratio is closely watched by rating agencies, which this year stripped national oil company Petroleos Mexicanos of its investment-grade rating and who warn that the nation’s sovereign rating could be next. Rating agencies have cited the impact of the coronavirus pandemic, interest rate changes, and a depreciation of the peso as the main risk factors for further downgrades, according to Fitch Ratings. Mexico had a gross debt to GDP ratio of 60.2% updated to June, about 10 percentage points above the level at the close of 2019, official statistics show. In a document issued after the president’s state of the union address last week, the government revealed the new upper limit of 70%. President Andres Manuel Lopez Obrador said his government’s decision to avoid debt-fueled economic stimulus meant the country had healthy finances. Lopez Obrador also promises an austere 2021 budget which is due to be presented to Congress by the finance ministry late on Tuesday.


According to a New York Times report, the US is considering banning some or all products made with cotton from China’s Xinjiang province. The report said the ban could be announced as early as today, in response to the use of forced labor on minority Muslims (Uighurs) in Xinjiang. Also, on the wire’s morning, is a statement from US President Donald Trump, in which he said that if re-elected, he would seek to de-couple the country from China. This means that he will seek to end a significant amount of business between the two countries. This statement came on the same day that data from China showed it had a trade surplus of more than $58 billion. This is in contrast with the US trade deficit of more than $63 billion. As we move closer to the US elections in November, US-China tension will be a main focal point.


Economy Minister Paulo Guedes said the Brazilian economy is undergoing a “V-shaped recovery”—a phrase used by economists to refer to an intense resumption following a dramatic decline in the economic activity. The minister spoke during an online hearing of the bicameral Commission on the fiscal situation and budgetary and financial execution of the measures to tackle the novel coronavirus. Guedes mentioned that April was the floor of the retraction in the Brazilian economy due to the influence of the COVID-19 pandemic, and argued the 9.7 percent shrinkage in the country’s gross domestic product (GDP) in the second quarter “is a sound from far away.” “It’s the sound from the impact of the pandemic long ago, and it’s where Brazil would have stayed if we, alongside Congress, hadn’t done exactly everything we did. With the action we took, we managed to create a V rebound—the economy is coming back in a V,” he pointed out. Guedes went on to say that the projections of analysts for the decline in the economy are improving. “Starting now and going until the end of the year, I believe the [projected reduction] may lower even further. The truth is that [the economic activity] is coming back; and it’s coming back with two digits [of growth]. Credit is coming with two digits, electric energy consumption is coming back with two digits, electronic receipts are coming back with two digits. It’s all slowly coming back. It’s all coming back. By the end of the year, Brazil’s economic decline maybe four or 4.5 percent, or even a little less. We can’t tell yet,” he declared.


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